Chapter 1 Test Bank

Ethical Issues in Advanced Accounting

Multiple Choice Questions

LO1

1. Research and development is a driver of business combinations

for all of the following reasons except?

a. Lower operating costs

b. Acquisition of intangible assets
c. Operating loss carryforwards
d. Reduced business risk of acquiring established product
lines

LO2

2. A business combination in which a new corporation is created

and two or more existing corporations are combined into the
newly created corporation is called a:

a. merger.
b. purchase transaction.
c. pooling-of-interests.
d. consolidation.

3. A business combination occurs when a company acquires an equity

interest in another entity and has:

a. at least 20% ownership in the entity.

b. more than 50% ownership in the entity.
c. 100% ownership in the entity.
d. control over the entity, irrespective of the percentage
owned.

4. FASB favors consolidation of two entities when

a. One acquires at least 20% equity ownership of the other.

b. One acquires between 20% and 50% equity ownership in the
other.
c. One acquires two thirds equity ownership in the other.
d. One gains control over the entity, irrespective of the
equity percentage owned.

LO3
LO4

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5. Michangelo Co. paid accountants and lawyers $100,000 in order
to acquire Florence Company. Michangelo will treat the
$100,000:

a. an expense for the current year.

b. a prior period adjustment to retained earnings.
c. additional cost to investment of Florence on the
consolidated balance sheet.
d. a reduction in paid-in capital.

6. Picasso Co. issued 10,000 shares of its $1 par common stock,

valued at $400,000, to acquire shares of Bull Company in an
all-stock transaction. Picasso paid the investment bankers
$35,000. Picasso will treat the investment banker fee as:

a. an expense for the current year.

b. a prior period adjustment to Retained Earnings.
c. additional goodwill on the consolidated balance sheet.
d. a reduction in paid-in capital.

7. Durer Inc acquired Sea Corporation in a business combination

and Sea Corp went out of existence. Sea Corp developed a patent
listed as an asset on Sea Corp’s books at the patent office
filing cost. In recording the combination:

a. fair value is not assigned to the patent because the

research and development costs have been expensed by Sea
Corp.
b. Sea Corp’s prior expenses to develop the patent are
recorded as an asset by Durer at purchase.
c. the patent is recorded as an asset at fair market value.
d. the patent's market value increases goodwill.

8. In an acquisition, the company whose assets are acquired:

a. will go out of existence.

b. will become a subsidiary of the acquiring company.
c. will be dissolved along with the acquiring company to form
a new corporation.
d. None of the above are correct.

9. According to FASB Statement 141, which one of the following

items may not be accounted for as an intangible asset apart
from goodwill?

a. a production backlog
b. talented employee workforce
c. noncontractual customer relationships
d. employment contracts

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10. When negative goodwill occurs in a business combination
calculation,

a. The negative goodwill is considered an impairment.

b. The value is allocated first to reduce proportionately
(according to market value) non-current assets, then to
non-monetary current assets, and any negative remainder is
classified as a deferred credit.
c. allocated first to reduce proportionately (according to
market value) non-current assets, and any negative
remainder is classified as an extraordinary gain.
d. allocated first to reduce proportionately (according to
market value) non-current, depreciable assets to zero, and
any negative remainder is classified as a deferred credit.

11. With respect to goodwill, an impairment

a. Will be amortized over the remaining useful life.

b. Is a two step process which analyzes each business unit of
the entity.
c. Is a one step process considering the entire firm.
d. Occurs when asset values are adjusted to fair value in a
purchase.

Use the following information in answering questions 12 and 13.

Manet Corporation exchanges 150,000 shares of newly issued $1 par

value common stock with a fair market value of $25 per share for all
of the outstanding $5 par value common stock of Gardner Inc and
Gardner is then dissolved. Manet paid the following costs and
expenses related to the business combination:

Costs of special shareholders’ meeting

to vote on the merger 6,000
Registering and issuing securities $14,000
Accounting and legal fees 9,000
Salaries of Manet’s employees assigned
To the implementation of the merger 15,000
Cost of closing duplicate facilities 11,000
Costs of special shareholders’ meeting
to vote on the merger 7,000

12. In the business combination of Manet and Gardner:

a. the costs of registering and issuing the securities are

included as part of the purchase price for Gardner.
b. only the salaries of Manet's employees assigned to the
merger are treated as expenses.
c. all of the costs except those of registering and issuing

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 the securities are included in the purchase price of
Gardner.
d. only the accounting and legal fees are included in the
purchase price of Gardner.

13. In the business combination of Manet and Gardner

a. all of the items listed above are treated as expenses.

b. all of the items listed above except the cost of
registering and issuing the securities are expensed.
c. the costs of registering and issuing the securities are
deducted from the fair market value of the common stock
used to acquire Gardner.
d. only the costs of closing duplicate facilities, the
salaries of Manet's employees assigned to the merger, and
the costs of the shareholders' meeting would be treated as
expenses.

LO5

14. Which of the following methods would does FASB consider best in
Statement 142 in the evaluation of goodwill impairment?

a. Senior executive estimate

b. Financial analyst forecasts
c. Market value
d. Present value of future cash flows discounted at the firm’s
cost of capital

15. Raphael Company paid $2,000,000 for the net assets of Paris
Corporation and Paris was then dissolved. Paris had no
liabilities. The fair values of Paris’ assets were $2,500,000.
Paris’s only non-current assets were land and equipment with
fair values of $160,000 and $640,000, respectively. At what
value will the equipment be recorded by Raphael?

a. $0
b. $240,000
c. $400,000
d. $640,000

16. According to FASB 141, liabilities assumed in a purchase

acquisition will be valued at:

a. estimated fair value.

b. historical book value.
c. current replacement cost.
d. present value using market interest rates.

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17. Medici Corporation acquires all of the voting stock of Zeus
Corporation for $900,000 cash. The book values of Zeus’ assets
are $850,000, but the fair values are $820,000 because
inventory has a fair value below its book value. Zeus has no
liabilities. Goodwill from the combination is computed as:

a. $900,000 less the fair value of Zeus’ net assets.

b. $900,000 less the book value of Zeus net assets.
c. $900,000 less (the assets’ fair values minus the assets’
book values).
d. $900,000 less (the assets’ book values minus the assets’
fair values).

18. Goodwill arising from a business combination is:

a. charged to Retained Earnings after the acquisition is

completed.
b. amortized over 40 years or its useful life, whichever is
longer.
c. amortized over 40 years or its useful life, whichever is
shorter.
d. never amortized.

19. The founders of an acquired company are granted a contingent

payment for three years after the acquisition based on those
years earnings:

a. The acquirer typically recognizes the payment as goodwill

when the contingency is resolved and payment is given.
b. The acquirer typically recognizes the payment as goodwill
when the contingency is resolved.
c. The acquirer typically includes the expected payments based
on future earnings as goodwill at acquisition.
d. The acquirer typically amortizes contingencies over the
applicable award period.

20. The first step in assigning the cost of an acquired company is

to determine the fair values of all identifiable assets and
liabilities. According to FASB Statement 141, the current
replacement costs be the values for which of the following:

a. both raw materials and finished goods inventories.

b. plant and equipment and finished goods inventories.
c. plant and equipment and raw materials inventories.
d. land and plant and equipment.

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Exercises

LO2
Exercise 1

On January 2, 2005 Bison Corporation issued 100,000 new shares of its

$5 par value common stock valued at $19 a share for all of Deer
Corporation’s outstanding common shares. Bison paid $15,000 to
register and issue shares. Bison $10,000 for the direct combination
costs of the accountants. The fair value and book value of Deer's
identifiable assets and liabilities were the same. Summarized balance
sheet information for both companies just before the acquisition on
January 2, 2005 is as follows:

Bison Deer

Cash $ 150,000 $ 120,000

Inventories 320,000 400,000
Other current assets 500,000 500,000
Land 350,000 250,000
Plant assets-net 4,000,000 1,500,000
Total Assets $5,320,000 $2,770,000

Accounts payable $1,000,000 $ 300,000

Notes payable 1,300,000 660,000
Capital stock, $5 par 2,000,000 500,000
Paid-in capital 1,000,000 100,000
Retained Earnings 20,000 1,210,000
Total Liabilities & Equities $5,320,000 $2,770,000

Required:

1. Prepare Bison's general journal entry for the acquisition of

Deer assuming that Deer survives as a separate legal entity.

2. Prepare Bison's general journal entry for the acquisition of

Deer assuming that Deer will dissolve as a separate legal entity.

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LO2

Exercise 2

On January 2, 2005 Altamira Company issued 80,000 new shares of its

$2 par value common stock valued at $12 a share for all of Lascaux
Corporation’s outstanding common shares. Altamira $5,000 for the
direct combination costs of the accountants. Altamira paid $10,000 to
register and issue shares. The fair value and book value of Lascaux's
identifiable assets and liabilities were the same. Summarized balance
sheet information for both companies just before the acquisition on
January 2, 2005 is as follows:

Altamira Lascaux
Cash $ 75,000 $ 60,000
Inventories 160,000 200,000
Other current assets 200,000 250,000
Land 175,000 125,000
Plant assets-net 1,500,000 750,000
Total Assets $2,110,000 $1,385,000

Accounts payable $ 100,000 $ 155,000

Notes payable 700,000 330,000
Capital stock, $2 par 600,000 250,000
Paid-in capital 450,000 50,000
Retained Earnings 260,000 600,000
Total Liabilities & Equity $2,110,000 $1,385,000

Required:

1. Prepare Altamira's general journal entry for the acquisition of

Lascaux assuming that Lascaux survives as a separate legal entity.

2. Prepare Altamira's general journal entry for the acquisition of

Lascaux assuming that Lascaux will dissolve as a separate legal
entity.

LO4

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Exercise 3

Dolmen Corporation purchased the net assets of Carnac Inc on January

2, 2005 for $280,000 and also paid $10,000 in direct acquisition
costs. Carnac's balance sheet on January 2, 2005 was as follows:

Accounts receivable-net $ 90,000 Current liabilities $ 35,000

Inventory 180,000 Long term debt 80,000
Land 20,000 Common stock ($1 par) 10,000
Building-net 30,000 Paid-in capital 215,000
Equipment-net 40,000 Retained earnings 20,000
Total assets $360,000 Total liab. & equity $360,000

Fair values agree with book values except for inventory, land, and
equipment, that have fair values of $200,000, $25,000 and $35,000,
respectively. Carnac has patent rights valued at $10,000.

Required:

Prepare Dolmen's general journal entry for the cash purchase of

Carnac's net assets.

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LO4

Exercise 4

The balance sheets of Palisade Company and Salisbury Corporation were

as follows on December 31, 2004:

Palisade Salisbury
Current Assets $ 260,000 $ 120,000
Equipment-net 440,000 480,000
Buildings-net 600,000 200,000
Land 100,000 200,000
Total Assets $1,400,000 $1,000,000
Current Liabilities 100,000 120,000
Common Stock, $5 par 1,000,000 400,000
Paid-in Capital 100,000 280,000
Retained Earnings 200,000 200,000
Total Liabilities and $1,400,000 $1,000,000
Stockholders' equity

On January 2, 2005 Palisade issued 60,000 of its shares with a market

value of $40 per share in exchange for all of Salisbury's shares, and
Salisbury was dissolved. Palisade paid $20,000 to register and issue
the new common shares. It cost Palisade $50,000 in direct combination
costs. Book values equal market values except that Salisbury’s land is
worth $250,000.

Required:

Prepare a Palisade balance sheet after the business combination on

January 1, 2005.

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LO4

Exercise 5

Paradise Inc purchased the net assets of Sublime Company on January

2, 2005 for $160,000 and also paid $5,000 in direct acquisition
costs. Sublime's balance sheet on January 2, 2005 was as follows:

Accounts receivable-net $180,000 Current liabilities $ 25,000

Inventory 180,000 Long term debt 90,000
Land 30,000 Common stock ($1 par) 10,000
Building-net 30,000 Paid-in capital 225,000
Equipment-net 30,000 Retained earnings 100,000
Total assets $450,000 Total liab. & equity $450,000

Fair values agree with book values except for inventory, land, and
equipment, that have fair values of $200,000, $25,000 and $35,000,
respectively. Solitaire has patent rights valued at $10,000.

Required:

Prepare Paradise's general journal entry for the cash purchase of

Sublime's net assets.

LO4

Exercise 6

On January 2, 2005 Tennessee Corporation issued 100,000 new shares of

its $5 par value common stock valued at $19 a share for all of Alaska
Company’s outstanding common shares in a purchase acquisition.
Tennessee paid $15,000 for registering and issuing securities and
$10,000 for other direct costs of the business combination. The fair
value and book value of Alaska's identifiable assets and liabilities

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were the same. Summarized balance sheet information for both
companies just before the acquisition on January 2, 2005 is as
follows:

Tennessee Alaska
Cash $ 150,000 $ 120,000
Inventories 320,000 400,000
Other current assets 500,000 500,000
Land 350,000 250,000
Plant assets-net 4,000,000 1,500,000
Total Assets $5,320,000 $2,770,000

Accounts payable $1,000,000 $ 300,000

Notes payable 1,300,000 660,000
Capital stock, $5 par 2,000,000 500,000
Paid-in capital 1,000,000 100,000
Retained Earnings 20,000 1,210,000
Total Liabilities & Equities $5,320,000 $2,770,000

Required:

Prepare a balance sheet for Tennessee Corporation immediately after

the business combination.

LO4&5

Exercise 7

New York Corp. purchased the net assets of Arizona Company on January
2, 2005 for $200,000 and also paid $5,000 in direct acquisition
costs. Arizona's balance sheet on January 2, 2005 was as follows:

Accounts receivable-net $ 90,000 Current liabilities $ 27,000

Inventory 180,000 Long term debt 88,000
Land 30,000 Common stock ($1 par) 15,000
Building-net 30,000 Paid-in capital 215,000
Equipment-net 30,000 Retained earnings 15,000
Total assets $360,000 Total liab. & equity $360,000

Fair values agree with book values except for inventory, land, and
equipment, that have fair values of $200,000, $25,000 and $35,000,
respectively. Arizona has patent rights valued at $10,000.

Required:

1. Prepare an allocation schedule for the purchase of Arizona's net

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 assets.

2. Prepare New York's general journal entry for the cash purchase of
Arizona's net assets.

LO5

Exercise 8

Book values and fair values of Portrait Corporation’s assets and

liabilities at January 2, 2005, are shown below:

Book Fair
Assets Values Values
Other current assets $ 250,000 $ 250,000
Inventories 300,000 380,000
Land 200,000 400,000
Buildings-net 600,000 480,000
Equipment-net 460,000 460,000
$1,810,000 $1,970,000

Liabilities and Equities

Current liabilities $ 190,000 $ 190,000
7% Bonds payable 600,000 540,000
Common stock 1,000,000
Retained earnings 20,000
$1,810,000 $1,970,000

Palette Corporation acquires all of the outstanding common voting

stock of Portrait for $1,400,000 cash and Portrait Corporation then
goes out of existence.

Required:

Prepare a schedule to allocate the $1,400,000 investment cost to

Portrait’s assets and liabilities on January 2, 2005.

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LO5

Exercise 9
In a business combination on January 2, 2005 Horus Inc issues 20,000
shares of its $5 par common for all of the outstanding stock of
Namar. Namar is dissolved. Horus pays $60,000 for direct combination
costs and $40,000 to register its securities. Horus’ stock has a
market price of $60 on January 2, 2005. Balance sheet information for
both firms on January 2, 2005 is as follows

Horus Namar Namar

Cost Cost Fair Value
Cash $ 240,000 $ 20,000 $ 20,000
Inventories 100,000 60,000 60,000
Accounts receivable 200,000 180,000 200,000
Land 160,000 40,000 200,000
Plant assets-net 1,350,000 400,000 700,000
Total assets $2,000,000 $700,000

Notes payable $ 400,000 $ 100,000 $ 50,000

Capital stock, $5 par 1,000,000 200,000
Paid-in capital 400,000 100,000
Retained earnings 200,000 300,000
Total Liabilities & Equities $2,000,000 $700,000

Required:

Prepare journal entries to record the business combination.

LO 5
Exercise 10

Balance sheet information for Sphinx Company at January 1, 2005, is

summarized as follows:

Current assets $ 230,000 Liabilities $ 300,000

Plant assets 450,000 Capital stock $10 par 200,000
Retained earnings 180,000
$ 680,000 $ 680,000

Sphinx’s assets and liabilities are fairly valued except for plant
assets that are undervalued by $50,000. On January 2, 2005, Pyramid
Corporation issues 20,000 shares of its $10 par value common stock
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for all of Sphinx’s net assets and Sphinx is dissolved. Market
quotations for the two stocks on this date are:

Pyramid common: $28.00

Sphinx common: $19.50

Butler pays the following fees and costs in connection with the
combination:

Finder’s fee $10,000

Costs of registering and issuing stock 5,000
Legal and accounting fees 6,000

Required:

1. Calculate Pyramid’s investment cost of Sphinx Corporation.

2. Calculate any goodwill from the business combination.

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15
Solutions:

Multiple Choice Questions

1 A 2 d 3 d 4 b 5 c
6 D 7 b 8 d 9 b 10 d
11 B 12 b 13 c 14 c 15 b
16 D 17 c 18 d 19 a 20 c

Exercise 1

1. General journal entry recorded by Bison for the acquisition of

Deer (Deer survives as a separate legal entity):

Investment in Roger 1,900,000

Common stock 500,000
Paid-in capital 1,400,000
Investment in Roger 10,000
Paid-in capital 15,000
Cash 25,000

2. General journal entry recorded by Bison for the acquisition of

Deer (Deer dissolves as a separate legal entity):

Cash 95,000
Inventories 400,000
Other current assets 500,000
Land 250,000
Plant assets 1,500,000
Goodwill 100,000
Accounts payable 300,000
Notes payable 660,000
Common stock 500,000
Paid-in capital 1,385,000

Exercise 2

1. General journal entry recorded by Altamira for the acquisition of

Lascaux (Lascaux survives as a separate legal entity):

Investment in Lascaux 960,000

Common stock 100,000
Paid-in capital 860,000
Investment in Lascaux 5,000
Paid-in capital 10,000

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 Cash 15,000

3. General journal entry recorded by Altamira for the acquisition of

Lascaux (Lascaux dissolves as a separate legal entity):

Cash 60,000
Inventories 200,000
Other current assets 250,000
Land 125,000
Plant assets 750,000
Goodwill 55,000
Accounts payable 155,000
Notes payable 330,000
Common stock 100,000
Paid-in capital 850,000

Exercise 3

General journal entry for the purchase of Carnac's net assets:

Accounts receivable 90,000

Inventory 200,000
Land 25,000
Building 30,000
Equipment 35,000
Patent 10,000
Goodwill 15,000
Current liabilities 35,000
Long-term debt 80,000
Cash 290,000

Exercise 4

The stockholders' equity section for Palisade Corporation subsequent

to its acquisition of Salisbury Corporation on January 1, 2005 will
appear as follows:

Palisade Corporation
Balance Sheet
January 1, 2005
Current Assets $ 310,000
Equipment-net 920,000
Buildings-net 800,000
Land 350,000
Goodwill 180,000
Total Assets $2,460,000
Current Liabilities 220,000
Common Stock, $5 par 1,150,000
Paid-in Capital 890,000
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Retained Earnings 200,000
Total Liabilities and $2,460,000
Stockholders' equity

Exercise 5

General journal entry for the purchase of Sublime's net assets:

Accounts receivable 90,000

Inventory 200,000
Current liabilities 35,000
Long-term debt 80,000
Cash 165,000
Extraordinary gain 10,000

Exercise 6

Tennessee Corporation
Balance Sheet
January 1, 2005

Assets: Liabilities:
Cash $ 245,000 Accounts payable $1,300,000
Inventory 720,000 Notes payable 1,960,000
Other current assets 1,000,000 Total liabilities 3,260,000
Total current assets 1,965,000

Land 600,000 Equity:

Plant assets-net 5,500,000 Common stock ($5 par) 2,500,000
Goodwill 100,000 Paid-in capital 2,385,000
Total L.T. assets 6,200,000 Retained earnings 20,000
Total equity 4,905,000
Total assets $8,165,000 Total liab.& eq. $8,165,000

Exercise 7

1. Allocation schedule for Arizona's net assets.

Total purchase price $205,000

Fair value of current assets $290,000
Less: fair value of all liabilities 115,000
Net difference 175,000
Amount allocable to non-current assets $ 30,000

Allocation Schedule for Non-current Assets

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 Non-current Fair Value % of Total Allocable $ Amount
Asset $ Fair Value $ Amount Allocated
Land 25,000 25 30,000 7,500
Building 30,000 30 30,000 9,000
Equipment 35,000 35 30,000 10,500
Patent 10,000 10 30,000 3,000
Total 100,000 100 30,000 30,000

2. General journal entry for the purchase of Arizona's net assets:

Accounts receivable 90,000

Inventory 200,000
Land 7,500
Building 9,000
Equipment 10,500
Patent 3,000
Current liabilities 27,000
Long-term debt 88,000
Cash 205,000

Exercise 8

Allocated
Item Fair Value
Purchase Cost 1,400,000
Book Value 1,020,000
Cost in excess of book 380,000

Market in excess of book

Inventory 80,000
Land 200,000
Building net -120,000
7% Bonds 60,000
Identifiable Differences 220,000

Goodwill 160,000

Exercise 9

Allocated
Item Fair Value
Purchase Cost 1,260,000
Book Value 600,000
Cost in excess of book 660,000

Market in excess of book

Accounts Receivable 20,000
Land 160,000
Plant Assets net 300,000
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Notes Payable 50,000
Identifiable Differences 530,000

Goodwill 130,000

Investment 1,260,000
Paid-in capital 40,000
Common stock 100,000
Paid-in capital 1,100,000
Cash 100,000

Cash 20,000
Inventories 60,000
Accounts Receivable 200,000
Land 200,000
Plant assets 700,000
Goodwill 130,000
Notes payable 50,000
Investment 1,260,000

Exercise 10

Requirement 1

FMV of shares issued by Pyramid: 20,000 x $28.00= $ 560,000

Finder’s fees 10,000
Legal and accounting fees 6,000
Total acquisition cost for Sphinx Corporation: $ 576,000

Requirement 2

Investment cost from above: $ 576,000

Less: Fair value of Sphinx’s net assets ($680,000 of
total assets plus $50,000 of undervalued plant assets
minus $300,000 of debt) 430,000
Equals: Goodwill from investment in Sphinx: $ 146,000

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